The Kerala boys, playing in their maiden semifinal, took time to find their feet and fell behind in just the sixth minute when Prikanta directed the ball in the net.
MSP struck back through Salman K in the 19th minute to restore parity and then kept things tight to take the match to penalties.
The pressure of the tie-breaker and the vociferous crowd support for Kerala affected the boys from Manipur as P Rabindro and skipper Sunder missed the first two shots and handed the match to the opposition.
In the remaining two quarterfinals, Air Force School, Subroto Park will take on Sports Hostel Tamil Nadu while FC Dynamo Kyiv will face Steqlal High School, Afghanistan on Friday. The winners of these matches will face off in the second semifinal on Saturday.
Meanwhile, Air Force Bal Bharti School pumped in five goals against Daman and Diu in the group encounter with Uma Shankar (21, 35) and Anirban (25, 30) scoring two each.
Sports Minsiter Ajay Maken and the Ministry of Sports and Youth Affairs have come forward with their support and for the first time two league matches were played at the Jawaharlal Nehru Stadium.
